Should Business Angels Charge for their Services?

Should business angels charge for pitches or do they risk their reputation by doing so?

Paying to pitch is it a good idea or bad idea? This question stirs up a lot of anger amongst entrepreneurs and even some business angels, but business angel networks and consultants are on the whole keen to defend the idea. So who is right?

With business lending being squeezed, it is clear that more and more businesses are going to be looking to business angels to provide them with the capital they need to grow their businesses. Finding business angels can be tough – and so it should be. Angel investors shouldn’t need to go around with it tattooed on their foreheads

Business angels are certainly interested in helping the more promising ventures with funding, but they are hardly likely to want to be swamped by requests to invest on a daily basis.

To help connect the two parties, business angel firms and networks have sprung up to help smooth the process. Speed funding events are organised and a fee is requested from the entrepreneur to submit their business plan to a group of angel investors who then decide whether or not they want to invest.

In essence then, those who run business angel firms act in a similar way to modelling or talent agencies. No-one complains about the way a modelling agency does business. They make money by asking their clients to pay a few hundred pounds to have a model portfolio created, even though there is no guarantee the person paying for it will become the next Katy Price.

The trouble is there is something about paying a fee to business angels which for some people is even more irritating than sitting through an hour of What Katy Did Next. As a result some business angel firms and their associates are regarded in some quarters as fallen angels out to squeeze already hard-up businesses of their valuable cash even though they have plenty themselves.

But without angel investor networks, funding would be harder to come by for those sound business ideas as these businesses would be forced to find angel investors themselves. This would require a great deal of time, effort and networking. Time is money and how many start-ups have the luxury of time to travel around the country networking and looking for funding? That time would be better spent concentrating on the growth of their business.

So angel groups then, are providing a service not only for business angels, but for entrepreneurs looking for funding. Fees for these services of course vary from a few hundred to a few thousand pounds to evaluate business plans. Some in the US will go as far as charging £25,000!

The anti-fee lobby is certainly gathering momentum on this issue. They regard it as unfair that entrepreneurs are asked to pay a fee to wealthy investors simply to get noticed. They also ask, why should we pay a business angel to have a look at our business plan when we think it will make them richer? Those in the anti-fee corner will also say that those who do pay may not be the most investable entrepreneurs out there. The flipside is, those businesses serious about their idea will not hesitate to pay to have their idea brought before a business angel. These factors are all worth considering and there are valid arguments on both sides when it comes to paying for pitches.

The answer is that a middle ground needs to be found to satisfy both sides. A lack of transparency in the sector is creating a culture where almost anyone can offer an introduction service at almost any price. There is no standard fee and firms are free to charge whatever they like for access to angel investors.

Luckily most are genuine and will lead the entrepreneur with the sound business idea to the investment they need. This cannot be relied upon, however, as the sector grows and more unscrupulous operators move in. Fees are here to stay because the firms who ask for them wouldn’t be able to operate without them. But there needs to be a greater degree of transparency and a better idea of what is an acceptable fee and whether or not the entrepreneur will get value for money by paying it. Business angels andindependent angel networks can then keep their good name.

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  • I think it’s okay in some instances because you can narrow down your options if you charge a fee to review submissions.

    At theseedblast.com we connect Entrepreneurs to Angel Investors, Hard Money Lenders, Venture Capitalist and more for Free.

  • John
    The main transparency issue is that as an entrepreneur nobody tells you up front who the angel investors will be attending your presentation, nothing about their interests, and nothing about their willingness to invest. So, I am going in front of them just went two days ago, strongly signaling the need for investment but I do not have any info about their openness to make an investment, not to mention their financials details. And on top of this you are trying to argue that I should pay them to pitch!!! It seems you never tried to pitch to a room of BAs.
  • I think the more important point isn’t if or, but how much. All parties have to pay something, even if its free. If not at the door chances are the drink prices at the event will be higher than usual. So if your at an event for a few hours chances are you will have to spend something to get there, take time out of your business to be there, spend something on the marketing assets for the event and then spend more on nurturing the potential relationships.

    The point about how much means you factor in the total cost to each party for the occasion. One danger of the upfront standard event charges is they tend not to factor in the total cost to the participants (all sides)in the pricing. Since they cannot cannot guarantee the next Microsoft I really don’t see the point of charging more than to cover the cost of hosting the event, especially when you have crowd funding as a growing source of funding which may charge less up front with greater probability of funding in the end.

  • I think it is important to look at the whole equation.

    If you spend 200 hours writing your pitch – that is an investment.

    If you don’t see your 200 hours as an investment, then I’d suggest you will struggle to make effective use of your limited time.

    Hence, if you have already made 200 hours of investment – would you be willing to back that with some cash? You should be, if you believe the idea.

    On the other hand, how good are the investors who turn up? This is an absolutely valid question.

    If they are tyre kickers or just retired FDs who were part of a sale (but never a key part nor the driving force) then you may be getting someone who is looking to dabble rather than drive your business with you.

    So, as an entreprenuer, I’d add up my TOTAL cost – time, cash – and also reputation.

    Then I’d look carefully at the networks and see who was going to give me excellent value for my investment.

    In terms of paying? That question is a red herring – look instead at whether you get value for your entire investment.

    Br
    Neil

    ps. Most start ups that I see are looking for funds to drive their marketing and sales effort. There is another way – why not find a highly efficient model to achieve the same marketing and sales results – but for far less cash? How to do this? Well, recruit freelancer marketing, sales and digital talent – or outsource your marketing entirely – you can do this at http://www.EnterpriseFreelanceFair.co.uk

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